by Gene Denardo

Created on: May 08, 2009   Last Updated: May 27, 2009

An asset bubble is the difference between the inherent or utility value of an asset and its perceived value or cost. During the peak of an asset bubble, the price of an asset may be many or even hundreds of times higher than its use value. The item is no longer purchased for its use, a phenomenon referred to as accumulation or in the extreme sense, hoarding, and instead is purchased for its value appreciation alone; referred to as speculation.

An asset is basically any item of value. It is a good that is owned and has an economic value. However, if we leave the economic world for a moment, an asset can certainly be anything of value. A prayer could be a "spiritual asset" and a thought could be a "mental asset". But, for the most part, when speaking of "asset bubbles", we need to stay in the accounting world of values and costs.

The "bubble" is an apt description of the inflation of the value or cost of the asset. The value is in this sense filled with air and doesn't represent the true "nature" of the item's value. The value of a good can be either the subjective or personal worth of the good and/or the overall worth that we all bestow on the good. Cost is simply the numerical value of the item in relation to all other goods in the economy at the time. Price is that value in dollars and cents.

Although the reference to bubble is also accurate because of the probability that the bubble will "pop" and lose all its air or inflated value, it is possible for asset bubbles to sustain for very long or even indefinite periods. Diamonds are a good example. Their cost and value has always been far above their practical use value. Part of this is due to their secondary use value as a "medium of exchange" during troubling times. In times of large refugee movements, such as the World War II, victims often exchanged the entirety of their wealth and belongings for a diamond or two because of ease of transport and ability to conceal. When they finally arrived in a safe haven, they were able to exchange the diamonds for things of immediate value and use. In a sense, the diamonds became "money", much like precious metals.

A recent example of a sustained asset bubble is that of electric guitars. Although electric guitars have only been marketed for a bit over fifty years, the early models have attained and held values that far exceed their use. Early Fender Stratocasters, a relatively simple solid body guitar, can fetch prices upward of fifty thousand dollars. Obviously,

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